Decisions to Use International Financial Markets
Oct. 21, 2014Decisions to Use International Financial Markets As a financial analyst for Blades, Inc., you are reasonably satisfied with Blades’ current setup of exporting“Speedos” (roller blades) to Thailand. Due to the unique arrangement with Blades’ primary customer in Thailand, forecasting the revenue to be generated there is a relatively easy task. Specifically, your customer has agreed to purchase 180,000 pairs of Speedos annually, for a period of 3 years, at a price of THB 4,594 (THB ¼ Thai baht) per pair. The current direct quotation of the dollar-baht exchange rate is $0.024. The cost of goods sold incurred in Thailand (due to imports of the rubber and plastic components from Thailand) runs at approximately THB 2,871 per pair of Speedos, but Blades currently only imports materials sufficient to manufacture about 72,000 pairs of Speedos. Blades’ primary reasons for using a Thai supplier are the high quality of the components and the low cost, which has been facilitated by a continuing depreciation of the Thai baht against the U.S. dollar. If the dollar cost of buying components becomes more expensive in Thailand than in the United States, Blades is contemplating providing its U.S. supplier with the additional business. Your plan is quite simple; Blades is currently using its Thai-denominated revenues to cover the cost of goods sold incurred there. During the last year, excess revenue was converted to U.S. dollars at the prevailing exchange rate. Although your cost of goods sold is not fixed contractually as the Thai revenues are, you expect them to remain relatively constant in the near future. Consequently, the baht denominated cash inflows are fairly predictable each year because the Thai customer has committed to the purchase of 180,000 pairs of Speedos at a fixed price. The excess dollar revenue resulting from the conversion of baht is used either to support the U.S. production of Speedos if needed...
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